Author: [email protected]

January 25, 2024 | by RSM US LLP

As remote and hybrid work have become institutional factors in business operations and labor markets, an increasing number of organizations have formalized policies governing their employees’ work location.

However, policies that do not consider relevant state and local tax ramifications potentially expose companies to costs and penalties associated with noncompliance.

Whether a business is updating its policy or still developing one, incorporating the following state and local tax considerations may help the organization comply with laws in their jurisdictions and avoid unintended, costly consequences of noncompliance.

Nexus footprint and Public Law 86-272 considerations

A remote workforce can significantly affect a company’s state tax nexus footprint. Specifically, establishing nexus through remote workers could cause new income and franchise tax and sales and use tax obligations if nexus was not previously established in the employee’s resident state.

A company is generally considered to be doing business subject to a state’s tax laws if the company has employees working in the state. Businesses with employees working remotely, if they would have otherwise worked in an office location, could be subject to a state’s tax laws based merely on employees’ presence.

A commuting employee living in a different state than their employer’s location would not normally create nexus for the employer; but as a remote worker, that employee attributes presence to the employer through performance of their duties at home. Importantly, a business can establish nexus through many other mechanisms beyond the presence of employees, including through holding property in the state or based on sales into a state.

Additionally, some businesses may have had nexus in a state but were not subject to an income tax liability because of a federal safe harbor known as Public Law 86-272. This law prohibits a state from imposing a net income tax on a seller’s business activity if it is limited to soliciting orders for sales of tangible personal property. An employee working from their residence may cause the company to lose that protection.

Finally, a remote workforce that establishes nexus for any state tax could create and complicate registration and compliance obligations. Businesses subject to tax in new jurisdictions may result in remarkably different apportionment factors for income tax purposes. Businesses selling taxable goods or services in those jurisdictions may need to start charging and remitting sales tax as well.

Withholding individual income taxes

With remote employee scenarios, businesses must determine where, and in some cases if, they must withhold state and local income taxes.

Generally, individual income tax jurisdiction is governed by an employee’s state of residence or state of employment. However, there are exceptions.

Some states subject a nonresident employee of an in-state employer to tax on 100% of their wages if certain requirements are met under the “convenience of the employer” rule.

Other states and certain localities will subject any employee activity occurring in their jurisdiction to tax. While some bordering states in parts of the U.S. provide for reciprocal individual income tax agreements, most states do not. Navigating the application of nonresident individual income tax rules can be exceedingly complex.

Supporting compliance with human capital management technology

For businesses to remain in compliance with state and local tax laws, they must have up-to-date information about their employees’ remote work locations and the number of hours employees are working there. Human capital management (HCM) applications can support those compliance processes.

Businesses can structure work policies and practices to make it easy for workers to update information themselves into an HCM application. By engineering processes and workflows in an HCM system that’s integrated with the business’s payroll function, the business can capture data correctly and administer it efficiently.

For remote and hybrid employees, an HCM application can also help manage other issues with tax implications, including compensation, benefits, expenses and reimbursements. Those capabilities can enable companies to operationalize remote and hybrid work arrangements as an effective component of their strategy to recruit and retain employees.

The takeaways

Businesses with employees in remote or hybrid work arrangements could be creating new nexus jurisdictions or withholding requirements due to the nature of an employee working from their residence. A state and local tax advisor can help a company understand the complex laws that apply to their specific jurisdictions and circumstances.

An organization that understands how remote and hybrid work arrangements affect their state and local tax footprint may structure their policies to address tax costs. HCM applications can help operationalize those policies by managing the flow and administration of employee data.

When a company’s policies, processes and technology work in harmony, they can support tax compliance and help the organization effectuate its strategy to appeal to workers with the flexibility a remote or hybrid arrangement offers.

January 19, 2024 | by RSM US LLP

Executive summary 

Momentum continues to build towards a potential tax agreement that would couple an expanded child tax credit with a temporary reinstatement of certain TCJA-related business tax benefits, including:

1. Research and development (R&D) expensing (section 174)
2. Less stringent business interest limitations (section 163(j))
3. Continuation of 100% bonus depreciation

To that end, proposed legislation H.R. 7024, the “Tax Relief for American Families and Workers Act of 2024” key tax writers in the Senate and the House, building upon a framework agreement released Jan. 16, that would further advance these provisions toward potential enactment. However, significant obstacles remain, including the need for buy-in from senior lawmakers, as well as the support (and vote) from enough lawmakers in both the House and the Senate to ensure passage. The framework also includes disaster relief provisions, enhanced section 179 expensing benefits, expansion of the low-income housing tax credit, and relief from double taxation for Taiwan residents. The proposals would be completely paid for by barring new employee retention credit (ERC) claims after Jan. 31, 2024. 

Discussion

Senate Finance Chairman Ron Wyden and House Ways and Means Chairman Jason Smith have proposed legislation that would temporarily postpone certain scheduled tax increases for the “big 3” business provisions that were enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) in exchange for an expanded child tax credit. The Tax Relief for American Families and Workers Act of 2024 represents the culmination of a months-long negotiating process between key lawmakers, and the measure must now navigate a tricky political environment where Congress is faced with several competing priorities, and where action before the impending tax filing season is critical. The House Ways & Means Committee marked up, and ultimately approved by a 40-3 vote signifying strong bipartisan support, the legislative text on Friday Jan. 19, and the full House will likely take up the measure when they return from recess on Jan. 29, if not sooner. ?

Both the legislative text as well as the Joint Committee on Taxation’s summary of the measure provide additional details of the initial proposals, which may change as the bill advances through Congress. A summary of those initial proposals, as set forth in the framework, as well as our preliminary observations, is provided below. Further changes or modifications will be addressed as needed in subsequent insights from RSM. 

Deduction for research and experimental expenditures.?The framework delays the date on which taxpayers must begin capitalizing their domestic research or experimental costs and amortizing them over a five-year period, as required under the TCJA. Under the proposal, taxpayers would be able to deduct currently (rather than capitalize) domestic research or experimental costs that are paid or incurred in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2026. Foreign research and experimental costs would continue to be capitalized and subject to amortization over a 15-year period.

Observation: Hope for restoration of full expensing for qualifying R&E expenditures under section 174 has been at the top of the wish list for many impacted businesses since the law change became effective in 2022 and is considered a critical component to the package. 

Less stringent business interest deduction limitation.?Under the framework, deductibility of business interest would increase for many taxpayers. The limitation or cap on business interest would revert to an amount based on an EBITDA approach (i.e., earnings before interest, taxes, depreciation, and amortization) , in place of the current more-stringent EBIT (i.e., earnings before interest and taxes) calculation. The provision would take effect for taxable years beginning after Dec. 31, 2023 (and, if elected, for taxable years beginning after Dec. 31, 2021), and before Jan. 1, 2026, thus allowing for potential retroactive treatment.

Observation: How a taxpayer would elect retroactive application for taxable years beginning after Dec. 31, 2021 is not specified in the legislation. Should this bill become enacted, taxpayers wishing to make the election would need to wait for additional procedures from the Treasury and IRS that specify how to make the election.

Observation: Where control of a business entity has changed in a sale (or other transaction), the framework’s retroactive aspects may give rise to business issues. Additional tax deductions retroactively available for either interest or for research and experimental expenditures can still provide tax benefit for the business after the sale. However, the transaction documents for the sale may restrict who can make the tax filings needed to pursue the tax benefit and may dictate whether the additional tax benefit could result in a purchase price adjustment, Taxpayers engaging in merger and acquisition activity should consider the provisions of their transaction documents prior to pursuing any retroactively available tax benefits.

Extension of 100% bonus depreciation. The provision extends 100% bonus depreciation for qualified property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (Jan. 1, 2027, for longer production period property and certain aircraft.)

Increased expensing of depreciable business assets. The provision increases the maximum amount a taxpayer may expense under section 179 for qualifying property to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. The $1.29 million and $3.22 million amounts are adjusted for inflation for taxable years beginning after 2024. The proposal would apply to property placed in service in taxable years beginning after Dec. 31, 2023.

Child tax credit. As currently proposed, the framework would expand and extend the child tax credit for three years and would modify the calculation of the refundable child tax credit to enable more families with multiple children to claim a larger credit before running into limits based on earned income. The framework would increase the current child tax credit of $2,000 per child for inflation in tax years 2024 and 2025. In determining their maximum child tax credit, taxpayers would be able to use earned income from the prior taxable year to the extent it exceeds the current year’s amount. The provisions on the child tax credit would be effective for tax years 2023 through 2025.

Observation: It remains to be seen whether proponents of an expanded child tax credit will view these changes as sufficient to meet their demands for a COVID-era equivalent credit, including full refundability, and whether proponents of adding work requirements to the credit will support this provision, or require additional modifications. ???? 

Increasing global competitiveness. The framework provides targeted and expedited relief from double taxation on US-Taiwan cross border investment through changes to the U.S. tax code Notably, it would provide certain treaty-like benefits for income from US sources that is earned or received by qualified residents of Taiwan, contingent on reciprocity to U.S. persons with income subject to tax in Taiwan. Such benefits would generally include (i) reduced withholding tax rates on interest, dividends and royalties; (ii) an increased permanent establishment threshold, and (iii) favorable tax treatment on certain wages of qualified residents of Taiwan that are performing personal services in the U.S. (subject to certain exclusions). The framework includes a provision that would authorize the President to consult with Congress and negotiate an agreement with Taiwan, as none currently exists. 

Observation: In broad brush, these provisions would allow the Biden Administration to negotiate and conclude an executive agreement that would contain provisions similar to those contained in a tax treaty that the U.S. might conclude with a new treaty partner. We expect that the agreement would contain provisions that would grant relief from double taxation including access to the U.S. competent authority.?It remains to be seen whether any future agreement(s) would provide benefits more advantageous than those available under the U.S.-China double tax treaty. Presumably, the agreement will include information reporting/exchange provisions as well.?

Assistance for disaster-impacted communities 

Casualty loss relief for certain disasters

The framework extends the rules for the treatment of certain disaster related personal casualty losses passed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, including the elimination of the requirement that casualty losses must exceed 10% of adjusted gross income (“AGI”) to qualify for the deduction, to a potentially large amount of disasters. While the AGI limitation would be removed, each separate casualty would still be subject to a $500 floor (a very small limitation in the grand scheme). Further, the taxpayer would be able to take this casualty loss “above the line”, meaning even if they don’t itemize their deductions, they are allowed to claim the casualty loss in addition to the standard deduction. 

Observation: It is our understanding that this provision would relate to many, if not all, of the disasters listed on the IRS website, Tax relief in disaster situations | Internal Revenue Service, starting with the ones listed in 2020 through 2023 and any that occur within 60 days after the date of enactment of this proposal – so a significant amount of disasters. Any future disasters within this 60-day period must still be declared a major disaster by the President. This proposed legislation would provide much needed relief to Taxpayers who experienced casualty losses, especially those victims of Hurricane Ian, Hawaii Wildfires, California Storms and Wildfires, among many other disasters. 

Qualified wildfire relief payments

The framework also includes relief in the form of an exclusion from gross income for compensation for losses or damages resulting from qualified wildfires relief payments. Qualified wildfire relief payments mean any amount received as compensation for losses, expenses, or damages (including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages), personal injury, death or emotional distress) as a result of a qualified wildfire disaster that were not compensated by insurance or otherwise. A qualified wildfire disaster is defined as any federally declared disaster as a result of any forest or range fire. This provision applies to qualified wildfire relief payments received by the individual during taxable years beginning after Dec. 31, 2019 and before Jan 1, 2026. It should be noted that this provision is clear that no double benefit is allowed and as such, no deduction or credit shall be allowed for any expenditure to the extent the amount was excluded from income. Further, if the taxpayer uses these qualified payments on any property they shall not be allowed to increase their basis in the property. 

East Palestine (Ohio) disaster relief payments 

This provision provides necessary relief from the victims of the East Palestine Ohio train derailment insofar that relief payments will be treated as qualified disaster relief payments as defined in section 139(b). Section 139(b) allows these relief payments to be excluded from gross income. East Palestine Train Derailment Payments means any amount received by an individual as compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) result from the East Palestine train derailment if such amount was provided by (1) a Federal, State, or local government agency, (2) Norfolk Southern Railway, or (3) any subsidiary, insurer, or agent of Norfolk Southern Railway. East Palestine train derailment means the derailment of a train in East Palestine, Ohio on Feb. 3, 2023. This provision applies to payments received on or after Feb. 3, 2023.

More affordable housing. This provision of the framework seeks to increase the supply of affordable housing by increasing the ceiling on the state housing credit (for purposes of the low-income housing tax credit) for calendar years 2023 through 2025. This would allow states to allocate more credits towards affordable housing projects. In addition, the framework would lower the bond-financing threshold (as part of the tax-exempt bond financing requirement) to 30% for projects financed by bonds with an issue date before 2026, subject to a transition rule for certain buildings that already have bonds issued.

Employee retention credit. The framework would end the period for filing ERC claims for both 2020 and 2021 as of Jan. 31, 2024 and would beef up penalties on a “COVID-ERTC promoter” (as separately defined) who is aiding and abetting the understatement of a tax liability or who fails to comply with certain due diligence requirements relating to the filing status and amount of certain credits. While these changes would stop any claims from being filed before the standard period for filing ERC claims ends (April 15, 2024 and April 15, 2025), it would not have any retroactive effect for claims filed prior to Jan. 31, 2024. However, the framework would extend the statute of limitations period on assessment for all quarters of the ERC to six years from the later of the original filing or the date of the claim. This could potentially allow, for example, a claim filed on Jan. 1, 2024, for the second quarter of 2020, to be examined and adjusted until Jan 2, 2030. This would enable the IRS to examine and seek the return of ERC refunds for years to come. 

The proposed legislation also provides for an extension on the period of time to amend corresponding income tax returns on which employers may have reduced wage deductions to account for the prohibition on claiming ERC on wages deducted from income; however as currently drafted this additional extension seems to only apply to individual and corporate returns and not partnership returns. This proposal would bring parity to the period for making an adjustment to the wage deduction with the period of time the IRS has to make adjustments to the ERC claimed, correcting a mismatch between the limitations period currently in existence on the third and fourth quarters of 2021. 

Next steps

As indicated above, the House Ways & Means Committee marked up the bill on Friday, Jan. 19, where the measure passed by a very strong vote of 40-3 in favor. According to the House’s calendar, a recess is planned for the week of Jan. 22, with members returning Monday, Jan. 29 which happens to coincide with start of the tax filling season, as announced recently by the IRS. The next step would be for the full House to consider the measure on the floor, and if passed, would be sent to the Senate for consideration. Timing will be tight, however, as many lawmakers view Jan. 29 as a deadline for House passage. It is possible that timing could shift beyond this date somewhat to the extent significant progress has been made. There are no guarantees, however, and additional timing and procedural constraints could similarly surface in the Senate, where leading Republican Senators have expressed reservations, particularly around the child tax credit and have called for changes. This could further inject uncertainty into the process.  

It is important to keep in mind this is a very fluid and evolving development, and that ultimate passage of a tax bill is far from certain. Moreover, the provisions (and accompanying observations) described above are subject to potential change as the negotiation process moves forward. 

RSM US LLP’s Washington National Tax and Tax Policy team members are actively monitoring developments and will be issuing additional insights as warranted.

December 21, 2023 | by RSM US LLP

Executive summary

The IRS announced plans to provide automatic penalty relief for failure to pay penalties incurred in tax years 2020 and 2021 on income tax obligations. Eligible taxpayers include individuals, businesses, trusts, estates and tax-exempt organizations that meet certain qualifying criteria. The IRS is taking this step in tandem with the resumption of mailing automated notices of amounts due which had been temporarily suspended during the COVID-19 pandemic.

Millions of taxpayers will receive penalty relief for failure to pay penalties

The IRS announced a plan to relieve certain eligible taxpayers of failure to pay penalties incurred with respect to the taxpayers’ 2020 and 2021 income tax returns. The plan will provide automatic relief of about $1 billion in penalty assessments to approximately 4.7 million individuals, businesses and tax-exempt organizations that may not have received automated collection reminders during the COVID-19 pandemic. The relief has already been provided to eligible individual taxpayer accounts and will be provided to business accounts beginning in late December 2023. Relief will be granted to eligible trusts, estates, and exempt organizations in late February through March 2024. Taxpayers do not need to take any action to obtain the relief; it will automatically apply to eligible taxpayer accounts. Notice 2024-7 provides details about the relief including eligible taxpayers, eligible returns, the relief period and exceptions.

In February 2022, the IRS imposed a moratorium on mailing certain automated collection notices—except initial balance due notices—while it worked through a backlog of original and amended returns. The planned penalty relief is being provided to assist those who were not sent automated collection notices since February 2022, during which time the failure to pay penalties were continuing to accrue. The IRS will resume issuing automated reminder notices beginning in 2024 for balances due for taxable years 2021 and earlier.

The IRS will issue a special reminder letter starting next month that will alert taxpayers of outstanding liability, easy ways to pay and the amount of penalty relief they received, if applied. If the automatic relief results in a refund or credit rather than abatement of outstanding penalties, taxpayers will be able to determine whether they received automatic relief by checking their tax transcript.

Eligibility for Automatic Penalty Relief

Eligible Taxpayers

A taxpayer is eligible for automatic relief if the taxpayer:

1. Has assessed income tax of less than $100,000 (on a per-return, per-entity basis) for the 2020 or 2021 tax year as of Dec. 7, 2023, excluding any applicable additions to tax, penalties or interest;
2. Was issued an initial balance due notice on or before Dec. 7, 2023, for taxable year 2020 or 2021; and
3. Is otherwise liable during the “relief period” for accruals or additions to tax for the failure to pay penalty under section 6651(a)(2) or 6651(a)(3) with respect to an eligible return for taxable year 2020 or 2021.

The “relief period” is the period that begins on the date the IRS issued an initial balance due notice to an eligible taxpayer, or Feb. 5, 2022, whichever is later, and ends on March 31, 2024. Eligible taxpayers will still be liable for any failure to pay Eligible Tax Returns penalty that accrued before or after the relief period. Interest will continue to accrue during the relief period and eligible taxpayers are still liable for the accrued interest. The failure to pay penalty will resume on April 1, 2024, for taxpayers eligible for relief.

Eligible Tax Returns

The relief will automatically apply to taxpayers who meet the above criteria and who filed one of the following eligible returns:

Individuals

• Form 1040, U.S. Individual Income Tax Return
• Form 1040-C, U.S. Departing Alien Income Tax Return
• Form 1040-NR, U.S. Nonresident Alien Income Tax Return
• Form 1040-PR, Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia
• Form 1040-SR, U.S. Tax Return for Seniors
• Form 1040-SS, U.S. Self-Employment Tax Return 

Trusts, Estates, Certain Taxable Corporations and Certain Tax-Exempt Organizations

• Form 1120, U.S. Corporation Income Tax Return
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations
• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation
• Form 1120-FSC, U.S. Income Tax Return of Foreign Sales Corporation
• Form 1120-H, U.S. Income Tax Return for Homeowners Associations
• Form 1120-L, U.S. Life Insurance Company Income Tax Return
• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return
• Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment T
• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies
• Form 1120-S, U.S. Income Tax Return for an S Corporation
• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B)
• Form 1041, U.S. Income Tax Return for Estates and Trusts
• Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts
• Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts
• Form 990-T, Exempt Organization Business Income Tax Return

The automatic relief does not apply to any return for which the penalty for fraudulent failure to file under Section 6651(f) or the penalty for fraud under Section 6663 applies. The relief is also inapplicable to any failure to pay penalty in an offer in compromise that is accepted by the IRS. Lastly, the relief does not apply to any penalty for the failure to pay that is settled in a closing agreement under or finally determined in a judicial proceeding.

Taxpayers who meet the above criteria should be on the lookout for an IRS letter which details the amount of penalty relief that was applied to their account.

November 13, 2023 | by RSM US LLP

Executive summary: 2024 Inflation-adjusted items

The IRS revenue procedure provides the amount for inflation-adjusted items for 2024. Amounts adjusted for inflation include the individual tax brackets, the section 199A qualified business income thresholds, the average annual gross receipt limit to qualify as a small taxpayer, the limitations for section 179 expensing, estate and gift exemptions, as well as several other provisions.

2024 Inflation-adjusted items

On Nov. 9, 2023, the IRS released its annual revenue procedure containing the inflation-adjusted items for 2024. There are multiple provisions in the Internal Revenue Code that require the IRS to adjust the applicable dollar amounts for inflation – many of these relate to individual income taxes, while others relate to business income. Selected inflation-adjusted items are listed below. For the full listing, please review the linked revenue procedure:

Individual tax rate tables –The highest tax rate remains at 37%. This rate is applicable for taxable income over:

• $731,200 for married filing jointly
• $365,600 for married filing separately
• $609,350 for single filing taxpayers
• $609,350 for head of household

The top capital gains rate of 20% is applicable for taxable income over:

• $583,750 for married filing jointly
• $291,850 for married filing separately
• $518,900 for single filing taxpayers
• $551,350 for head of household

Estate and trust tax rate table – The estate and trust income tax rate is 37% for taxable income over $15,200. The 20% capital gains rate is applicable for estates and trusts with taxable income over $15,450.

Cafeteria plans – The annual limitation under section 125 for contributions to a health flexible spending account increased from $3,050 to $3,200.

Qualified transportation fringe benefit – The section 132(f)(2) monthly limitation for qualified transportation (in a commuter vehicle or mass transit passes) and qualified parking increased from $300 per month to $315 per month.

Election to expense certain depreciable assets under section 179 – Rev. Proc. 2023-34 raises the section 179 expensing limit under section 179(b)(1) to $1,220,000. The cost limit for sport utility vehicles expensed under section 179 will be $30,500. Under section 179(b)(2), the $1,220,000 limitation gets reduced by the amount that section 179 property placed in service during the 2024 taxable year exceeds $3,050,000.

Energy efficient commercial buildings deduction – the dollar value of the maximum allowance for the deduction under section 179D(b)(2) is set at 57 cents, which gets increased by 2 cents for every percentage point of certified energy and power reduction over the 25% threshold. Rev. Proc. 2023-34 raises the cap on the deduction to $1.13. The increased deduction for certain property under section 179D(b)(3) (i.e., building projects meeting certain prevailing wage and apprenticeship requirements) is set at $2.83 increased by 11 cents for every percentage point of certified energy and power reduction over the 25% threshold, with a $5.65 maximum.

Qualified business income – the threshold amount and phase-in range are adjusted as follows:

Filing Status	Threshold amount	Phase-in range amount
Married filing jointly	$383,900	$483,900
Married filing separately	$191,950	$241,950
Other returns	$191,950	$241,950

Limitation on use of cash method of accounting – the section 448(c) threshold for certain taxpayers to use the overall cash method of accounting, as well as other small business taxpayer simplified methods, is set at $30,000,000 in annual gross receipts averaged over the three taxable years ending prior to tax year 2024.

Threshold for excess business loss limitations – the excess business loss limitation threshold is increased to $305,000 ($610,000 if married filing jointly), an increase of $16,000 ($32,000 for joint returns).

Unified credit against estate and gift tax – the basic exemption amount is increased to $13.61 million for determining the amount of the unified credit for estate and gift tax.

Annual exclusion for gifts – the annual exclusion for gifts is increased to $18,000 per done for present interest gifts.

Note that certain other annually adjusted limitations are released in other guidance. A summary of qualified retirement plan limitations was previously published.